Market Overview
Markets are now settling down and are likely to remain very muted ahead of the two major risk events of this week, as the BoJ (Bank of Japan) and the FOMC get set to announce monetary policy. Both could conceivably undertake a significant shift in policy stance, although realistically only the BoJ has any realistic likelihood of actually doing so.
The BoJ announces early in the morning tomorrow and consensus is unsure over what course of action it will take. Will it cut the deposit rate? Will it alter its QE purchases program (quantitative) or will it alter its ETF/REITs purchases (qualitative)? Reportedly the committee is split on what to do next but could do some sort of reverse Operation Twist and shorten the duration limits of its QE purchases in an attempt to steepen the yield curve, thus improving the prospects for Japanese banks.
This would also give it room to focus more on negative interest rates if so desired. The risk is that the BoJ disappoints again as the Fed announces later in the day and could reduce the efficacy of the BoJ decision. The Fed is not likely to hike but could point decisively towards a December hike. Failure to do so would strengthen the yen (Why is the Fed holding off? What does it know? Should we be worried?).
However, in front of these decisions traders are unwilling to take a view. Equity markets on Wall Street and Asia were almost entirely flat overnight and European markets are following the same course. Forex majors are just having a little move against the dollar as the European session has taken over, but nothing substantial and the momentum is unlikely to build. Gold and silver are showing signs of support again, whilst the oil price suffered into the close yesterday on the back of renewed supply concerns. It is lower again today.
There is little on the economic calendar other than some US housing data. Building Permits are announced at 1330BST and are expected to improve slightly to 1.17m, whilst the Housing Starts are also at 1330BST and are expected to dip slightly to 1.19m.
Chart of the Day – DAX Xetra
The DAX topped out on the big selloff below the support at 10,442 last week and as yet has been unable to recover. The market moves since then have been confirming of the breakdown which completed a top that implies 360 ticks of downside back to 10,080.
There is nothing in the past week that has formed on the DAX that would suggest that the market is not still making its way lower towards this target. The daily sequence of lower highs continues and although yesterday’s gap up at the open was a bullish move, the small tight candlestick suggests that the move could still just be considered to be a rally that will be sold into.
The original gap lower from last week remains unfilled but this is increasingly looking as though it could be a “breakaway” gap that comes as a trend reverses. The momentum indicators are still looking corrective, whilst the old pivot band of around 100 ticks between 10,370/,10,475 is now a basis of resistance.
The daily chart shows Thursday’s rally hit a high of 10,446 (basically hit the resistance of the neckline of the top pattern before selling off again) and this is a growing resistance area now. The hourly chart shows the rebound yesterday has helped to unwind oversold hourly technical but does not show any sustainable recovery signal yet. The low from Friday at 10,262 is now supportive, but a continued retreat looks on now and rallies look to be a chance to sell. A test of the early August low at 10,092 still looks likely.
Despite the strength of Friday’s bearish candle the market has managed to regain some poise and settle down into what is likely to be an extremely quiet day of trading. The technical breach of the support at $1.1200 re-opened the key near term lows between $1.1120/$1.1140 but these remain intact and I expect will continue to do so throughout today in front of the two major risk events of the week (the BoJ and the FOMC). The old support at $1.1200 has turned into resistance as an attempt at a recovery yesterday failed at the breakdown level and a move between $1.1120 and resistance at $1.1200 can be expected again today. The early moves overnight are certainly pointing this way. Although the Stochastics are falling (which is hinting bearish), the RSI and MACD lines are still very neutral and the next key break is uncertain. Ultimately it will be the reaction to BoJ and the FOMC tomorrow which is likely to drive direction for the coming days/weeks.
Cable has begun to settle down following the sharp downside move on Friday. I discussed a gravitating towards the old medium term pivot at $1.3060 yesterday and there was certainly a degree of that through yesterday’s trading. The techncials would though continue to suggest that rallies should still be seen as a chance to sell within the medium term range. The recent two week trend lower of lower highs and lower lows continues and the momentum indicators are in corrective mode with the Stochastics now becoming bearishly configured and the RSI falling away below 50. The hourly chart shows momentum indicators just unwinding the bearish momentum that has built up recently and are suggesting that rallies will be sold into. The overhead resistance band between $1.3060/$1.3160 is a sell-zone with yesterday’s high at $1.3090 the near term resistance. The market is very settled today though and this could be a feature of trading over the coming hours in front of the two big central bank announcements. The technicals suggest that continued weakness below $1.3060 would open $1.2863 and the key range low at $1.2796.
The converging trendlines on the daily chart over the past month suggest that the pair is waiting for the next catalyst, something that is entirely understandable given that the BoJ (announces around 0400BST tomorrow) and the FOMC (announces at 1900BST tomorrow) could be set for momentous announcements. The market has settled into a tight range now between the support at 101.18 and resistance at 103.35. Technically the momentum is still marginally bearishly biased with the Stochastics in decline but the RSI and MACD lines are almost entirely neutral. The hourly chart shows that 102.00 is still an interesting pivot band very near term but I do not expect any real direction today ahead of the two central banks. It is interesting to note that the pair has been consistently negative in the wake of the BoJ announcements this year, however the rare occasion that the Fed announces on the same day will make playing the pair even more unpredictable tomorrow.
The long term bull arguments for gold remain intact with the uptrend since December still supportive (today at $1312) the floor of the medium term range at $1302 and the rising 89 day moving average at $1310. The last couple of completed daily candles reflect a market that is uncertain with how to be positioned and unwilling to take a view ahead of two major central bank decisions that could have such significant implications for not only risk appetite but also the strength of the dollar (two factors that are key for the direction on gold). On a technical basis the bulls would point towards the Stochastics now threatening a buy signal and the RSI picking up around 40, which would be positive for the resumption of bull control. The hourly chart shows an improvement but there is plenty of near term overhead supply to contend with, starting around $1318, but the main resistance near to medium term is now at $1325 and the main pivot at $1330. Expect a lot of volatility in the coming days as traders attempt to ascertain what the implications are from these central banks meetings for gold.
A pick-up in oil was forming yesterday and looked to be ready to change the outlook, but a sell-off into the close seems to have put the bear pressure back on once more. A failed recovery candle is a disappointment for the bulls and with an early dip back today, the long term uptrend is being tested once more. The recent corrective run lower in WTI formed a low at $42.75 and this is now the basis of a big uptrend since the February low. The big intraday swings on WTI continue but the daily technical indicators are still deteriorating, with the Stocahstics, MACD and RI all still in decline. The hourly chart shows a broken downtrend of the past week, but the drop off into the close yesterday has scuppered the potential for a recovery. There is support around the key low of $42.75 now but the resistance at the lower reaction high at $44.35 and the resistance band at $44.55/$44.75 continues to grow. The bearish bias suggests further pressure on the uptrend today.
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